UPSC Previous Year Question Paper 2026 -Indian Economic Service - Indian Statistical Service Examination-GENERAL ECONOMICS PAPER I

UPSC Indian Statistical Service Examination-GENERAL ECONOMICS PAPER I

Answers must be written in ENGLISH only.

1. Answer all the following seven parts : 5x7=35

(a) Given that the average revenue curve is a rectangular hyperbola, what will be the shape of the marginal revenue curve and why?

(b) Why are the assumptions of perfect competition and constant returns to scale considered inconsistent?

(c) Suppose that a monopolist faces a downward-sloping demand function q = 15p^(−0.89) for its produce, where q is quantity demanded and p is price per unit of q. Should the monopolist increase its price to increase revenue? Justify your answer.

(d) What is the economic interpretation of the Lagrange's multiplier for utility maximization problem?

(e) Why does the Coase theorem fail in the presence of high transaction costs?

(f) Graphically solve the following linear programming problem :

Minimize C = 80X + 60Y
subject to
2X + 2Y ≥ 3
2X + 0Y ≥ 1
X, Y ≥ 0

(g) If the time series data (Yₜ) follows an autoregressive process of order one [i.e., AR(1)], given by Yₜ = α + βYₜ₋₁ + εₜ, where εₜ is a pure white noise, show that the time series data (Yₜ) will also follow a moving average process of order infinity [i.e., MA(∞)].

2. (a) Distinguish between the method of compensating variation in income and that of cost difference with the help of a suitable diagram. 10

(b) Draw the compensated demand curves according to methods mentioned in part 2(a) and write down your interpretation. 8

3. (a) Consider the CES production function

Y = γ[δK^(−p) + (1 − δ)L^(−p)]^(−γ/p)

where Y, K and L are output, capital and labour respectively. Give the economic interpretation of the parameters γ, δ, ν and ρ, and show that the value of the elasticity of substitution is 1/(1 + ρ).

(b) Consider the following specific CES production function defined on x₁ > 0, x₂ > 0 :

y = f(x₁, x₂) = [0.3x₁^(−2) + 0.7x₂^(−2)]^(−1/2)

(i) Find the MRTS, and show that isoquants are strictly convex to the origin.

(ii) Show that f is homogeneous, and find its degree of homogeneity.

(iii) Is the function [0.3x₁^(−2) + 0.7x₂^(−2)]^(−1/2) + 1 homothetic? Justify your answer.

4. (a) If the production function is linear homogeneous, show that the expansion path is a straight line passing through the origin. 9

UPSC Previous year question paper Indian Economic Service - Indian Statistical Service Examination, 2026-GENERAL ECONOMICS PAPER I exam

1) MC is less than AC, where AC is falling; (ii) MC = AC at the point where the AC curve is horizontal; (iii) MC exceeds AC, where AC is rising.

5. (a) Consider a simple model Yᵢ = α + uᵢ, i = 1, 2, 3, ..., n, where uᵢ satisfies all the standard assumptions and n is the number of observations. Show that the OLS estimator of α, say α̂, is consistent. 10

(b) Explain the concept of Pareto optimality. Discuss why the provision of public goods fails to satisfy Pareto optimal conditions in a competitive market. 8

6. (a) Distinguish between Marshallian and Walrasian stability analysis. 6

(b) Discuss the welfare implications of pricing under incomplete information. Do you think regulatory intervention can improve outcomes? Justify your answer. 8+4=12

7. (a) Under perfect competition, find out graphically the conditions for normal profit, supernormal profit and the loss in equilibrium without using the average cost curve. 8

(b) Explain the equilibrium of a firm which has a monopoly in the domestic market but perfect competition in the world market. 10

8. (a) Let xᵢ = Xᵢ − X̄ and yᵢ = Yᵢ − Ȳ be the ith observation on Xᵢ and Yᵢ (i = 1, 2, 3, ..., n) in deviation form. Let X̄ and Ȳ be the respective means, sₓ² and s_y² be the variances of Xᵢ and Yᵢ respectively, and let r_XY stand for correlation coefficient between Xᵢ and Yᵢ. Prove that

r_XY = 1 − (1/2n)Σᵢ₌₁ⁿ[(xᵢ/sₓ) − (yᵢ/s_y)]² = −1 + (1/2n)Σᵢ₌₁ⁿ[(xᵢ/sₓ) + (yᵢ/s_y)]²

and hence −1 ≤ r_XY ≤ +1

(b) Derive the angle between the two regression lines and interpret the angle when r_XY = 0 and r_XY = ±1.

SECTION-C

Answer any three out of the following five questions :

9. (a) Consider a duopoly market with linear demand

P = 180 − 4Q; Q = Q₁ + Q₂

and asymmetric cost structures given by C₁ = 4Q₁ and C₂ = 10Q₂. If the firms collude and agree to divide the market equally

(i) find out the equilibrium price and output levels of each firm;

(ii) explain why the low-cost firm sets market price.

(b) What is monopoly power? Show that the monopoly power varies inversely with the price elasticity of demand. 2+3=5

(c) Solve the following game by using a suitable method :

Player B: B1 B2 B3 B4
Player A: A1: −2, 4, −1; A2: 3, −1, 5

10. (a) What do you mean by heteroscedasticity? Why does it come? 5

(b) What will be the consequences if you apply the OLS technique to estimate a linear model in the presence of heteroscedasticity? 7

(c) Consider a simple linear model Yᵢ = α + βXᵢ + uᵢ, i = 1, 2, ..., n, where the disturbance term is heteroscedastic. How should you proceed to estimate the parameters if you know about the nature of heteroscedasticity, that the variance of the disturbance term varies directly with the squares of the explanatory variable, that is, σᵤ² = σ²Xᵢ², where σ² is a constant? Compare this result with the result if you ignore heteroscedasticity. 9+4=13

11. (a) How does Kalecki's theory of distribution highlight the role of monopoly power, institutional factors, and class structure in shaping income distribution? 10

(b) Do you accept that Kalecki's distribution represents a powerful alternative to the neoclassical marginal productivity theory? 10

(c) What are the important differences between Kalecki's theory of distribution and Kaldor's theory of distribution? 5

12. (a) Discuss Pareto's law of income distribution and its empirical evidence. 9

(b) Derive the Lorenz curve and Gini coefficient for the theory of the Pareto distribution and explain their implications for inequality measurement. 9

(c) If the Pareto exponent (α) is 1·5, compute the Gini coefficient and interpret the degree of inequality. 7

13. (a) Distinguish between Leontief's closed and open input-output models. 5

(b) Derive Hawkins-Simon conditions in the static open input-output model and give their economic interpretations. 10

1.0  −0.5  0
−0.2  1.0  −0.5
−0.4  0  1.0

The primary input labour coefficients (per unit of output) are given as 0·4, 0·7 and 1·2, and the household demands for the output of three sectors are 1000, 5000 and 4000. Determine the level of employment and the volume of outputs. 10

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